Securing value for money, or value for members, particularly from a scheme’s asset managers, is central to
achieving good retirement outcomes. With this in mind, we consider what constitutes value for money and
whether it is being achieved.
What constitutes value for money?
Value for money is one of those terms most people understand but find hard to definitively measure and
benchmark. According to the Oxford English Dictionary, value for money is “something that is well worth the
money spent on it.” In other words, the focus shouldn’t only be on cost but also what is received in return –
that is, the net value added, or detracted.
Never is this truer than in the world of pensions, especially when it
comes to a scheme’s asset management. After all, low fund management fees and charges, in isolation, do not
necessarily imply good value, as factors such as the manager’s fund performance, the volatility of these returns,
service levels and the quality of communications also impact member outcomes.
What constitutes value for money?
Since 2015, both the Independent Governance Committees (IGCs) of DC contract-based pension schemes
and the Trustees of trust-based DC schemes have been required by the Financial Conduct Authority (FCA) and
the Pensions Regulator (TPR) respectively, to assess and annually report on the ongoing value for pension
policyholders1 and Value for Members (VFM).2 Additionally, TPR, in recognising the significant impact the annual
VFM assessment can have on helping to safeguard positive DC and DB member outcomes, also strongly
recommends that DB scheme Trustees do similarly.3
Of course, these annual regulatory assessments go beyond assessing the value added by a scheme’s asset
managers. Indeed, as holistic exercises, IGCs and Trustees are required to evaluate and benchmark the quality
and cost of all services received from all providers to a scheme, whether pertaining to scheme management
and governance, administrative efficiency, investment governance or communications.4 However, evaluating
the ongoing value received from a scheme’s asset managers is certainly one of the more impactful aspects of
this crucially important exercise, given the extent to which fund performance net of fees and charges ultimately
determines member outcomes.
Acknowledging this, since September 2019, the FCA has required asset managers to make rigorous and robust
annual Assessments of Value (AoV). Comprising disclosures around seven assessment criteria, principally net
fund performance against objectives, fees and charges and quality of service, AoVs are designed to better enable
pension schemes, amongst other investors, to make informed value for money comparisons.5 In order to further
facilitate this process, the Pensions and Lifetime Savings Association (PLSA), via its Cost Transparency Initiative,6
has created a set of templates and tools for pension schemes to receive standardised cost and charges information from their asset managers. However, after having recently conducted a review of 18 asset managers
(a relatively small sample),7 the FCA found that many of these managers had failed to provide sufficiently
informative AoVs, address shortcomings in their reporting and give explanations when value for money wasn’t
being delivered.8 Having made recommendations for improvement, the FCA will revisit these managers in 2022
to ensure material progress has been made.
Is value for money being delivered by asset managers?
In short, value for money is being delivered by some asset managers but by no means all. Indeed, this was
the conclusion reached by the Financial Times (FT), in a recently published article, which considered a study
into the value for money received by UK DB schemes – based on the performance, costs and transparency of
11,500 mandates of varying sizes managed by 420 asset managers across active and passive equities, fixed
income and alternative investment strategies.9 With an average annual fee paid for asset management of 0.65%,
these fees ranged from 0.09% to 2.63% per annum, with sub-£100m schemes being subject to the greatest fee
dispersion. Given the popularity of global equities mandates amongst DB schemes, another stand out statistic
plucked from the study is the 0.36% difference in the fees charged by a first versus a fourth quartile active global
equities asset manager, ranked on cost. For the average £109m active global equities mandate analysed, this
equates to a fee difference of almost £400,000 per annum.
Turning to assessing value for money within DC, two papers, one from Hymans Robertson11 and the other
from Dean Wetton Advisory (DWA)12 are helpful, albeit they reach slightly different conclusions. By applying a
retirement outcomes frame to master trust DC default funds, increasingly the dominant medium within DC,
both studies assess the prospective net value added of each provider’s principal default strategy by drawing on
factors such as recent past returns, the volatility of these returns, the strategic and dynamic asset allocation
policy adopted, expected future returns, charges and fees.
Using annualised three year master trust growth phase default fund performances and capital market
assumptions applied to each of the providers’ asset allocations, Hymans Robertson projects the likely (median)
fund values to be generated by each provider’s principal default fund in 30 years time, along with a projected
good (25th percentile), bad (75th percentile) and very bad (95th percentile) outcome. Whereas the dispersion
between the good outcomes and the probable is particularly high – the best good outcome is projected to
be almost 70% higher than the worst, while the dispersion for the median outcomes is almost 40% – that for
the bad and very bad outcomes is, reassuringly, low. However, in the consolidation phase, with values being
predicted five years prior to retirement, and the pre-retirement phase, one year from retirement, the dispersion
around outcomes within and between providers is even more elevated.13 DWA adopts a similar approach using a
proprietary tool to calculate the value added or subtracted over a certain period. For example, the study revealed
that for “a typical 40-year-old, the top-ranking default [fund] created £4,203 of value in the five years to the end
of the first quarter of this year compared to £1,280 for the [lowest ranking] default, a difference of £2,923.”
The report then goes on to say that, “As the age of the member increases, the difference in investment value
created shrinks as the member edges closer to retirement age, with the average gap falling from £2,640 for
a 40-year-old to £1,770 for a 60-year-old. This is likely as most pension schemes adopt a more conservative
investment approach in the later stages of a member’s pathway to retirement”.14
Perhaps unsurprisingly, given the heterogeneity of the master trust universe, not least in the number of diverse
return drivers each captures within their respective default fund portfolios, the differences in net value added
can be considerable.
Why does this matter?
Accepting that investment returns are never guaranteed whereas costs are the one factor that can be controlled,
the opportunity costs of solely focusing on charges rather than adopting a more holistic net value added mindset
can be considerable. Indeed, prioritising the former over the latter, by not considering the potential value add and
risk mitigating nature of more governance-intensive investment opportunities has, to some extent, compromised
the economics of portfolio construction and long-run risk-adjusted returns of both DB and DC.
However, changing the prevailing cost minimisation mindset applied to a scheme’s asset management to one
of maximising the net value added remains a challenge. This is particularly true within the world of charge-capped
auto-enrolled DC default funds. Although well intentioned, with the aim of ensuring that members receive value
for money, the charge cap has instead seen a race to the bottom with very little spent on investment.15
Sadly, the result has, in many cases, been to stifle innovation and creative thinking to the likely detriment of
member outcomes.
That’s not to say that genuine cost savings shouldn’t be sought. Indeed, achieving genuine cost savings can translate
into performance improvements for both DC and DB which can, in turn, take some of the pressure off
contribution rates. However, where a value for money assessment reveals poor value to members, it is vitally
important that trustees and IGCs identify the validity of the assessment and what steps can be taken to improve
matters – for example retendering the mandate, simplifying it or seeking scale-related discounts, depending on
the issue identified. Doing so should enhance member outcomes – sometimes considerably so.
